Multiple Choice Answers

1. Capital budgeting involves planning and justifying how money is spent on short-term items like inventory, and payroll as well as on long-term projects such as new business ventures, equipment replacement, and expansion. (Points : 5)
2. The cost of capital is a single rate that reflects the average return paid to investors who provide the firm’s capital. (Points : 5)
3. The NPV decision rules are based on the following statements that follow from the definition of NPV.
NPV > 0 , adds shareholder wealth
NPV = 0, no change in shareholder wealth
NPV < 0, reduces shareholder wealth (Points : 5)
4. The internal rate of return is analogous to the yield on a bond, because both are rates that equate inflows with outflows on a present value basis. (Points : 5)
5. An assumption implicit in the net present value technique is that all cash flows are reinvested at the cost of capital. (Points : 5)
6. Although the NPV method is technically superior, the IRR method is used more frequently. (Points : 5)
7. The least risky capital projects are replacements. Expansions and new business ventures are progressively more risky. (Points : 5)
8. Which of the following is not a cash flow consideration in evaluating capital budgeting projects? (Points : 5)
income taxes on incremental earnings
identifiable incremental overhead
incremental accounting profit (net income)
9. When estimating cash flows for capital budgeting projects, (Points : 5)
interest expenses incurred to finance the project are included
interest expense is considered in the cash flow estimates only if the financing is principally from debt
interest expense is never included in the cash flow estimates
none of the above
10. The most difficult part of the capital budgeting process is: (Points : 5)
estimation of the incremental project cash flows
application of evaluation techniques such as NPV or IRR
interpreting the results of the application of NPV or IRR
none of the above
11. Because depreciation is a non-cash expense item, it is not necessary to consider depreciation in estimating cash flows for a new capital project. (Points : 5)
12. An increase in net working capital increases operating cash flows. (Points : 5)
13. The incremental cash flow principle claims that sunk costs must be taken into account in the firm’s decision whether to accept or reject a project. (Points : 5)
14. Basic overheads are usually considered fixed and left out of project analysis. (Points : 5)
15. The terms “acquisition” and “takeover” are often used to refer to a merger because the stock of the firm that goes out of existence is usually acquired by the continuing firm. (Points : 5)
16. A consolidation occurs when all of the combining legal entities dissolve, and a new entity with a new name is formed to continue into the future. (Points : 5)
17. Acquiring firms rarely pay more than a small premium over their target’s premerger market price, because to do so would be an irrational transfer of wealth to the target’s stockholders. (Points : 5)
18. If Company F and Company G merge and become Company F, what happens to the stockholders of Company G? (Points : 5)
They become stockholders of Company F.
They are paid for their shares of Company G.
They lose their investment.
Either a. or b.
Any of the above could occur.
19. The category of business combination where the firms have a supplier-customer relationship is known as a (Points : 5)
vertical merger.
horizontal merger.
conglomerate merger.
none of the above
20. A combination of companies that compete directly is a (Points : 5)
conglomerate merger.
vertical merger.
horizontal merger.


1. Financial Assets can be distinguished from real assets in that financial assets (Points : 5)
are pieces of paper rather than tangible, physical objects.
are  intended to provide service like transportation or shelter.
have no value becasue they provide their owners with claims to future cash flows.
are things like cars, boats, or houses.

2. Financial management involves: (Points : 5)
general business decisions to manage personal careers.
providing oversight for the management of money.
purchasing things for the company.
both a and c

3. A big disadvantage of proprietorships versus corporations is: (Points : 5)
the inexperience of propietors.
the difficulty of raising money to start or expand the business.
difficulty to form or start
the limited personal liability of the proprietor.

4. In finance the primary goal of management is to: (Points : 5)
utilize the economic resources in the most advantageous way.
minimize all possible expenses.
maximize shareholder wealth which is generally achieved by maximizing the stock price.
make the best use of the assets.

5. The amount of money that would have to be invest today at a given interest rate over a specified period in order to equal a future amounts is called the: (Points : 5)
present value interest factor.
present value.
future value.
future value interest factor.

6. The future value of a dollar _________ as the interest rate increases and __________ the farther in the future the initial deposit is to be received. (Points : 5)
increases, increases
decreases; increases
decreases; decreases
increases; decreases

7. For a given interest rate, as the length of the time in the future until receipt of funds increases, the present value interest factor: (Points : 5)
remains unchanged.
changes proportionately.

8. Net working capital can be referred to as: (Points : 5)
total assets minus current liabilities.
current assets minus total liabilities.
cash minus current liabilities.
current assets minus current liabilities.

9. Which of the following would cause a decrease in cash: (Points : 5)
lengthening the time it takes to collect receivables from 15  to 30 days.
selling fixed assets for more money than book value.
an increase in accrued salaries expense.
paying suppliers in 60 days versus 45 days.

10. Liquidity ratios indicate (Points : 5)
a firm’s ability to meet short-term financial obligations.
how efficiently a firm is allocating its liabilities.
the return on assets.
the profitability of the firm.

11. The ________ is the exact amount of time it takes the firm to recover it initial investment in a project. (Points : 5)
net present value
internal rate of return
average rate of return
payback period

12. Capital budgeting involves how companies spend (Points : 5)
day to day resources.
money raised in capital markets.
expenses only.
large sums on long-term projects.

13. The most difficult and error-prone part of the capital budgeting process is: (Points : 5)
application of evaluation techniques such as NPV or IRR.
interpreting the results of the application of NPV or IRR.
estimation of the incremental project cash flows.
none of the above
all the above

14. Holders of common stock (Points : 5)
own the firm.
have loaned money to the firm.
receive interest payments.
receive guaranteed income.

15. The return on a share of stock consists of two principal yields: (Points : 5)
the capital gains yield and the capital appreciation yield.
the dividend yield and the capital gains yield.
the capital gains yield and the earnings per share.
all of the above.

16. The value of a bond is the present value of the (Points : 5)
maturity value.
interest payments and maturity value.
dividends and maturity value.
interest and dividend payments.

17. When interest rates move up or down, bond prices move: (Points : 5)
in the opposite direction.
in the same direction.
in the opposite direction and further the longer is the term until maturity.
in the same direction but less the longer is the term until maturity.

18. A combination of two entities in which only one legally ceases to exist is: (Points : 5)
a subsidiary
a parent company
a consolidation
a merger

19. The claims of equity holders on income have priority over: (Points : 5)
the claims of unsecured creditors.
the claims of preferred stockholders.
no one.
the claims of the creditors.

20. Large companies tend to do which of the following types of business planning? (Points : 5)
strategic planning
operational planning
budgeting and forecasting
all of the above